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investor clinic

My model Yield Hog Dividend Growth Portfolio is coming off a solid year in 2021 when it posted a total return, including dividends, of 23.1 per cent.

That wasn’t quite as scorching hot as the S&P/TSX Composite Index’s total return of 25.1 per cent, but I’m still pleased with the performance. The portfolio’s core mission, after all, is to generate a growing stream of cash, and with 20 of the 22 securities having raised their dividends in 2021, the portfolio’s annualized income is up 55 per cent since inception on Oct. 1, 2017.

Now, it’s time to take care of some business. Reinvesting dividends is one of the keys to building wealth and generating income, and today I’m announcing three purchases that will consume most of the more than $2,164 of virtual cash that’s accumulated in the model portfolio.

Buying good companies when they’re down in price is a time-honoured strategy. With that in mind, for my first purchase I’m buying an additional 50 shares of Algonquin Power & Utilities Corp. , bringing my total to 485 shares.

Algonquin’s share price has declined more than 20 per cent from its 52-week high last February. The drop reflects a combination of factors, including weaker-than-expected 2022 guidance, lower valuations for renewable power producers, and uncertainties around the pending acquisition of Kentucky Power Corp.

But here’s the silver lining for investors with cash to spend: As Algonquin’s stock price has dropped, its dividend yield has climbed to about 4.9 per cent, up from 3.5 per cent at the stock’s peak last year. So, every dollar invested now will bring in more dividend income. (Note: Algonquin declares its dividend in U.S. dollars, but as a Canadian company its payment still qualifies for the dividend tax credit in non-registered accounts.)

Despite the recent weakness in Algonquin’s share price, the renewable power producer and operator of electric, natural gas and water utilities still has plenty of growth ahead. At its annual investor day in December, Algonquin unveiled a new five-year capital plan of US$12.4-billion that it expects will drive compound annual growth of between 7 per cent and 9 per cent in adjusted earnings per share from 2022 through 2026.

Algonquin’s rising earnings, in turn, should keep its dividend growing – albeit at a slower pace than the 10-per-cent annual increases of previous years. Specifically, the company could increase its dividend by about 6 per cent annually while lowering its payout ratio to its target range of 80 per cent to 90 per cent over the next five years, down from an estimated payout ratio of 93 per cent for 2021, according to analyst Nelson Ng of RBC Dominion Securities.

“The company has a strong development pipeline in the renewable energy sector, and it has built up a regulated utility business that can grow organically or through acquisitions,” Mr. Ng said in a recent note.

For my second purchase, I’m adding 15 shares of TC Energy Corp. , for a total of 115 shares. This is another solid dividend stock that’s trading well down from its highs, which has pushed TC Energy’s yield up to an attractive 5.6 per cent.

Like Algonquin, TC Energy has throttled back its expected annual dividend growth rate, to a range of 3 per cent to 5 per cent, down from 5 per cent to 7 per cent. But the reduction makes strategic sense, as it will help fund $29-billion of secured capital projects for the pipeline and power company over the next five years. TC Energy says the investments are expected to drive compound annual growth of 5 per cent in earnings before interest, taxes, depreciation and amortization from 2022 through 2026.

For my third and final purchase, I’m picking up an additional 10 units of the iShares S&P/TSX 60 Index ETF , which brings my total to 285 units. Holding exchange-traded funds helps to improve portfolio diversification, which is why I also invest in ETFs personally to complement my core dividend stock holdings.

(Note: All three “purchases” were recorded at Monday’s closing prices, for a total cost of $2,147.55.)

I have no idea what will happen to the prices of AQN, TRP or XIU in the short run. But one thing I can say with confidence is that, by reinvesting dividends to increase my holdings of these and other income-producing stocks, my portfolio’s cash flow will continue to grow – which is the main objective of the model Yield Hog Dividend Growth Portfolio.

Full disclosure: The author also owns AQN and TRP shares personally.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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